Net Book Value
Accounting-speak. This is like book value, only the number is adjusted for depreciation (see Book Value, Depreciation).
Net Current Assets
Accounting-speak again. Anything in a business that can be easily and quickly converted into cash, usually within one year, to repay debts constitutes a current asset. Hey, another easy-peasy one:
Current Assets – Current Liabilities = Net Current Assets
Neutral Weighting
If the shares held in a managed fund comprise the same proportion (known as weighting) as that of the index or benchmark to which the fund is being compared, then it means that the fund has a neutral weighting in those shares (see Managed Funds, Overweight, Underweight).
New Issue
When a company or its shareholders sell shares for the first time on the stock market, which are offered to the public – you, me and a few million others – it is a ‘new issue’ and the fortunate (or not so fortunate, depending on which issues we’re talking about!) public get invited to subscribe for them:
1. A government-owned business is called a privatization and UK investors are offered shares in British Something or Other. In this instance you usually only get a small allocation of shares.
2. Very big companies are often offered to the public via an ‘Offer for Sale’ or an initial public offering called an IPO. An investment bank handles the sale of the company (see Investment Bank, Prospectus).
3. Smaller companies often favour a ‘placing’ because it costs them less to get listed on the Stock Exchange this way. These shares are usually sold to the big bods, ie, the institutions, via a stockbroker and are not so readily available to the general public (see Placing).
New issues don’t incur commission charges or the usual stamp duty levied on share purchases. But one word of caution – just because a share is newly coming to the stock market doesn’t automatically mean it’s going to be a roaring success. Indeed, quite a few of the new issues listed on the stock market in recent years have been dogs (see Dog). So, to quote an oft-repeated phrase and not because I want to impress you with my very limited knowledge of Latin, ‘Caveat emptor – buyer beware!’
Newsletter
Often the financial equivalent of that illustrious newspaper, Racing Post, these are published on a weekly, bi-weekly or monthly basis. In them will be ‘hot tips’ on shares that are (allegedly) likely to surge upwards overnight. In truth, since these often involve smaller companies that are naturally more volatile, and the newsletters reach thousands of small investors, it doesn’t take too many of them buying shares in a company to make the predictions self-prophesying. Still, some of them can be a useful source of information (see Nap).
New York Stock Exchange – NYSE
Sometimes called ‘Noisy’, sometimes called ‘Nice’, this is the world’s largest stock market by volume of business transacted. Shares are traded electronically.
Nikkei 225 Index
Like the FTSE 100, only it measures the financial health of the 225 largest blue-chip Japanese companies listed on the Tokyo Stock Exchange. It’s the one everyone looks to when they want to know how the Japanese stock market is doing (see Footsie – FTSE).
Nil-Paid Rights
This is when you have the right to own shares now but pay for them later. They are usually brought into existence in the early stages of a company’s rights issue (see Partly Paid Shares, Rights Issue).
Nominal Value
When a company issues its shares, it creates a notional value for each share. This notional value is called the nominal value, and is often 10p, 50p or £1. A share’s nominal value bears little or no resemblance to the price at which it is traded on the stock market. Nominal value can be changed by implementing a share split (see Share Split). It is NOT the same as par value, which describes the face value of bonds (see Par Value). Accounting enthusiasts should check out Share Premium Account.
Nominated Adviser – Nomad
Investment banks supervise and help the big companies to get on to the main Stock Exchange. But who looks after those young companies with high hopes and good ideas that are not ready to take their place on the big stock market stage yet? Nominated advisers, called ‘nomads’, help them to get listed on the fledgling stock market called AIM (see Alternative Investment Market – AIM). Although there are fewer rules and regulations surrounding the AIM-listing process, the onus is on the ‘nomads’ to make sure they only get involved with good companies or their own long-term reputations will suffer if they are seen to be promoting ropy ones.
Nominee Account
Also called a designated account. Basically, it’s when a stockbroker, or a similar financial institution, sets up an account for you that will hold all your shares. It’s called a nominee or designated account because it’s not in your name. It is in the name of the company that has set up the account for you. However, you are the beneficial owner of the shares and obviously any dividends paid to that shareholding belong to you. Some people find the anonymity in holding shares this way appealing. Obviously it’s important to make sure that whoever is holding the shares for you, ie, the intermediary, is trustworthy and passes all information and dividend payments on to you. The fly in the ointment is that nominee shareholders are not entitled to vote, receive annual reports or shareholder perks, which is a major bone of contention for many (see Shareholder Perks, Voting Shares).
Non-Marketable Securities
Also called unmarketable securities, this means you’ve bought them, but just you try and sell! Well, there’s the thing, you can’t. They’re not traded on the stock market or any other kind of market for that matter, including Chapel Market or the Portobello Road. Once you’ve got these, you are committed. No, I don’t mean you should be committed, just that you can’t change your mind and unload them on to someone else. So when you buy these, you’d better make sure you want them (see Marketable Securities, Securities).
Non-Voting Shares
These shares do not entitle you to vote at a company’s Annual General Meeting or at any other shareholders’ meetings, for that matter (see ‘A’ Shares, Voting Shares).
Notes to the Accounts
This is where those of you who enjoy combing through the laborious detail of a company’s affairs will have an absolute field day. By now you’ve whiled away a pleasant afternoon riveted by the contents of the annual report of a company in which you are interested to buy shares or bonds. You’ve seen that after the actual accounts, there is a section called ‘Notes to the Accounts’. This is usually much longer and even more thrilling than the accounts. Leaving no stone unturned (well sometimes they – shall we say -suppress things that they’re not supposed to), these offer copious explanations as to how the financial numbers were arrived at (see Accounts, Auditor, Auditor’s Report).
Ofex
This is an independent market that enables very young or small companies that do not have a stock market listing to raise money, increase their profile, get a valuation and a ‘trading facility’ ie, a means of getting their shares traded without being quoted on AIM or the main stock market. As these companies are smaller than companies listed on AIM or the stock market, there is, by definition, a higher risk associated with investments of this kind.
Offer
The price at which a share can be bought on the stock market (see Bid, Spread).
Offer Document
Not to be confused with a prospectus (see Prospectus). This is a very swanky-looking document issued by company A, which is bidding for company B, to the shareholders of company B. It aims to be as persuasive as possible and persuade the poor sap, I mean astute investor, to sell his or her shares and accept the offer being made by company A.
Offer For Sale
This is when a company sells its shares for the first time on the stock market and offers them to the general public and institutions. The terms ‘Initial Public Offering’ (IPO), ‘float’ and ‘flotation’ also mean the same thing.
Open-End Funds
These are collective funds managed by professional fund managers, which grow (or shrink) in size. Investors can pile in more and more cash, or alternatively take it out (in City-speak it’s called making redemptions), hence the reason why they are given the name ‘open-end’ funds. The price investors pay for each of the fund’s units reflects the spread, which, as for shares, is the differential between the price at which the units can be bought and sold. It also reflects the net asset value of the fund, which is fairly closely tied to the price of each unit, thus offering a certain amount of protection to the investor and the comfort of knowing that there are substantial assets backing each unit they own (see Closed-End Funds, Fund Management, Net Asset Value, Open-End Investment Company – OEIC, Spread, Unit Trust).
Open-End Investment Company -OEIC
This describes a type of unit trust (see Unit Trust). The main difference between an OEIC and a unit trust is that, with an OEIC, you buy and sell the units at one and the same price. With a unit trust, if you had to buy and sell units on the same day you would lose money because there is a difference between the price at which you can buy the units and sell them, which is called the bid/offer spread (see Spread). A relatively new type of fund in the collective fund spectrum, these are becoming increasingly popular (see Collective Funds, Managed Funds).
Organisation for Economic Co-operation and Development -OECD
A group of rich countries whose main aim is to encourage each other to achieve good economic growth, improved standards of living, ensure financial stability, and a whole load of other happy-clappy altruistic aims. Much time is spent by the OECD’s number crunchers trying to predict economic growth in the individual countries and the group as a whole.
Out of the Money
If you are the proud owner of a call or put option in shares (see Call Option, Derivatives – Options, Put Option), then, trust me, you will not want to exercise the option while it is ‘out of the money’. Why? Because you can get a better transaction price for the shares in the stock market than that at which your call or put option has been fixed (see At the Money, In the Money). This also applies to currency options or whatever.
Outperform
When the returns of an investment exceed the returns of the benchmark against which it is being compared (see Underperform).
Oversold
Before shares are oversold they have frequently been overbought in the first place! This term describes shares that are dumped wholesale by those who owned them previously. It often happens when a company delivers a bit of bad news, sending investors rushing for the exit door. If, in fact, the bad news was only a temporary glitch, the shares will bounce back quite rapidly. If the news is really gory, then the shares could bounce (in City-speak this is known as a ‘suckers’ rally’ or a ‘dead cat bounce’) and then plummet some more.
Over-the-Counter – OTC
This describes shares and bonds bought and sold over-the-counter, ie, not through an official exchange. In the United States, the market in OTC shares is absolutely vast and it’s called NASDAQ (see NASDAQ). Many of the companies with shares traded on it are huge – Bill Gates’s Microsoft is one of them – and they are very well researched. Others are not followed very widely, and as there isn’t so much information available to investors about them, they can be much higher-risk investments than the big ‘blue chips’.
Overweight
Fund managers who binge on cream buns! In truth, it’s when shares or bonds held in a fund comprise a higher proportion (known as weighting) than that of the index or benchmark to which the fund is being compared, ie, the fund is overweight in those shares, bonds, or whatever (see Neutral Weighting, Underweight).
Paper
A general term describing shares and bonds.
Partly-Paid Shares
When a company’s shares are brought to the market in the form of a new issue, investors more often than not have to cough up for them in one hit. However, there are some new issues that allow payment for the shares to be spread over two or three instalments. The privatization of British Telecom shares in 1984 (seems a lifetime ago) offered shares to the public, to be paid for in three tranches: Nov 1984, June 1985 and Nov 1986. Total cost, £1.50 per share (see Nil-Paid Rights).
Par Value
Also called value at par. All bonds have a par (face) value. Most, but not all, bonds have a par value of £100. This is what the investor who owns them gets at the time when the borrower pays off (redeems) the bond (see Bonds, Maturity Date).
Penny Share
Amazing this. A share that’s bought and sold on the stock market usually for less than a pound or just a few pennies. To the uninitiated, these may seem a bargain and incredibly good value, but in reality, of course, there is a catch. Most of them are pretty high-risk, almost like having a punt on the gee-gees. Habitual buyers of these should look upon any profits made as an unexpected bonus.
Pension
Groan. I can just see your eyes glazing over at this point. Wake up and enjoy this stimulating and mesmerizingly interesting topic! We all know the theory of a pension. It’s a large wodge of money that you have built up over your working life, which is supposed to provide for you in your dotage. Come retirement, you’ll be sipping Pina Coladas on the beach in the Bahamas from the carefully invested proceeds of that money. But there is a major snag -you can’t access the pension until the age of 50 (this will rise to 55 from 2010).
As of 6 April 2006, the whole pension world is being turned on its head. It’s such an important turning point that it’s now been named ‘A’ Day by the financial cognoscenti. As of this date there is just one single set of rules that applies to all pensions. So it’s dead simple for anyone who wants to go ahead with a new pension after that date. But for the millions who already have one, it’s going to be pretty complex because we will all have to make the transition to comply with the new rules. Consult the government’s website as a starting point: www.dwp.gov.uk.
Because pensions are such a long-term commitment, they need a lot of thought and are not to be entered into lightly. It makes sense to enlist a good independent financial adviser to guide you through the maze and explain your options. Make sure you go through the pros and cons of the myriad different pension plans on offer (see Independent Financial Adviser – IFA).
Should we buy a pension at all? Well, the government makes it almost irresistible to do so by offering full tax relief on contributions (see Tax Relief). The funds in the plan also grow tax-free. Rather than pontificate endlessly about this, I thought it best to simply lay out below the choice of pensions open to us.
State Benefits
Everyone who is fully employed is entitled to get state benefits at retirement, via National Insurance contributions, otherwise called NICs (see National Insurance). There’s the Old Age Pension, which most people get eventually, if they live long enough. Then there’s a top-up pension called SERPS (State Earnings Related Pension Scheme), which has been replaced by the State Second Pension (S2P). The amount of the top-up varies depending on your salary and work history.
The new S2P is ‘pay as you go’ and is likely to be drastically cut back in the future. This effectively means that anyone earning more than £9,000 a year will have to get their own private pension. Basically, you’re on your own mate! Everybody who is entitled to the S2P top-up is equally at liberty to opt out of state benefits and direct their NICs towards their own personal pension plan.
The government introduced a new personal pension plan called a Stakeholder Pension back in 2001. This has had the positive effect of forcing down the cost of pensions and is a very cost-effective way of buying one. All employers now have to provide a stakeholder for their employees. They won’t have to make contributions to it, but they will have to run it on the employee’s behalf. The government continues to put pressure on pension providers to lower the costs of personal pensions and make them more easy to understand. This has to be good news!
Company Pensions
Let’s tackle all you fully employed folk. This is easy. Nine times out of ten, you’re better off in your company pension plan. Phew, breathe a sigh of relief; no need to think any further. All you have to decide is whether you want to top it up with an AVC or not (see Additional Voluntary Contributions – AVC below). You’ve probably already sussed that company pension schemes are better than personal pensions because with the former, the company makes contributions to it on your behalf.
There are only two types of company pension (otherwise called occupational pensions): final salary and money purchase. The final salary is the optimum, but don’t turn your nose up at the slightly less advantageous money purchase variety. However, the only option available for self-employed folk, or employees without company pension schemes, is to go for a personal pension.
Final Salary Pension
Also runs under the confusing title of ‘defined benefits scheme’. With this type of pension what you get on retirement depends on three things: 1) your final salary level; 2) how many years’ service you’ve put in; and 3) the rate of accrual your employer gives you for every year you have worked for the company. Take an easy example: if you retire, having worked ten years for a company that is paying you 1/60 of your final salary per year, you’ll get 10/60 or 1/6 of your final salary. The maximum you can get is 1/30 of your final salary per year of service. The more common version is 1/60. This is by far the best type of pension you can get, and, if you’ve got one, you are definitely laughing.
Money Purchase Pension
Also called a ‘defined contributions scheme’. Jeepers-creepers, it’s as if they don’t want us to get a pension at all, given the jargon-loaded phrases they use! This can be a company or personal pension scheme. With the company variety, you and your employer make contributions to the pension, which are invested on your behalf in the company’s name. The fund of money grows tax-free, and when you retire, you get the proceeds, which have hopefully increased substantially over the years. However, while a final salary pension guarantees you a proportion of your salary, no matter what, you don’t get the same assurance with a money purchase one. With this, what you get depends on how well the fund has grown and the level of annuity rates when you retire. Whilst the money purchase isn’t quite as attractive as the final salary, both are usually a better bet than having solely to fund your own personal pension.
Personal Pension
For those of us not fortunate enough to be offered a good company scheme, the only alternative is to go out there and buy a personal pension, which is portable between jobs.
Self-Invested Personal Pension – SIPP
Now these are seriously good news for those who get enlightened about them. Most commonly called a SIPP, this kind of does what it says on the tin. It’s a personal pension, which is a tax-free container that you have to take out with a SIPP provider. You, as the owner of the SIPP, can put your money into any investment as long as pension rules allow it. You can choose what assets are bought or sold, and when they are bought or sold. The bad news is that, as of 6 April 2006, ie, the first day in the new tax year (also known as ‘A’ Day in the industry), SIPPs can only contain commercial property, not residential, as previously mooted by the government. Anyone considering buying commercial property for a SIPP needs specialist advice because there are all sorts of implications to popping property into one, and doing this won’t suit everybody. A good independent financial adviser will take the headache out of deciding whether this is the right type of pension for you.
Pension Annuity
Did someone mention nudity? Oh, annuity! A very large chunk of the money we save in a pension plan is used, on retirement, to buy us a secure annual income for life called an annuity. Historically, government law hasn’t allowed us to take all that lovely loot as one lump sum. Talk about spoiling our fun! Maybe it doesn’t trust us to spend it wisely. Whilst we have the good fortune to live longer than we used to, the result is that, together with the long-term drop in interest rates, annuity rates have been steadily falling in recent times. Unless there is a dramatic rise in interest rates we are unlikely to see an improvement in the situation. Many annuities look pretty paltry; so what’s the answer?
Don’t fall off your chair but there is some good news. After ‘A’ Day, ie, 6 April 2006, we still can’t take all the money out of our pension in a lump sum (shame!). However, whilst you can still take out an annuity from your pension, which means buying it all in one go on retirement as before, there is now the additional option of being able to use your pension to draw an income from the fund throughout your life. This makes it more flexible.
If you opt for an annuity, don’t forget that there’s no obligation to take it from the firm that’s supplied your pension. You can shop around and look for the sexiest annuity rates, using a good IFA or specialist annuity broker.
In truth, this whole area is so complex it really needs specialist expert advice; a good IFA can help you through the maze (see Independent Financial Adviser).
Additional Voluntary Contributions -AVC
An AVC is like an extension to your occupational (ie, work) pension. If you have a pension scheme you can choose to top it up with your own money. This means making AVCs – added voluntary contributions – to it so that you get more income during your retirement. Like pensions, AVCs are a tax-effective way of saving and are eventually paid out as a regular monthly income or lump sum. The only snag with these is that you cannot get access to the funds until you retire.
An in-house AVC is one set up by your employer and is normally subject to the main rules of the company’s pension scheme. A free-standing AVC is totally separate from your main pension scheme. Should you change jobs, you can take it with you. It is also confidential from employers. One advantage is that you can choose where the funds are invested. However, a major disadvantage with these is that they are more costly than in-house AVCs, which benefit from economies of scale.
Permanent Income-Bearing Shares – PIBS
These are not shares, as the title seems to suggest. They are in fact bonds issued by building societies (see Bonds). Like other bonds, they are tradable and can be bought and sold via a stockbroker. And like other bonds traded on the market, the price of these can go up as well as down, so they are not necessarily totally ‘safe’ places to put money just because they come from a building society. PIBS make a twice-yearly pre-agreed interest payment to their holders. As they are irredeemable, ie, the loan is never paid back, this interest is paid ad infinitum (see Maturity Date).
